Cross-Eyeing: Shorting EUR/CAD on a Fib Level – Trade Closed

With all the uncertainty in the markets and in response to the S&P downgrade of U.S. debt, traders and hedge fund managers decided to dump their positions in higher-yielding assets. Equity markets fell over 10% over the past couple of days, while commodities took a major hit across the board.

Unfortunately, oil has been one of the biggest losers as well, with WTI crude prices falling almost 20% over the past week. Ay caramba!

This of course, did not bode well for my trade. Traders sold the Canadian dollar aggressively, which burned my short EUR/CAD position. It didn’t help that Canadian employment figures were largely disappointing as well, with only 7,100 jobs added to the economy last month.

This one hurts a little bit, as I thought I picked a perfect retracement point, as I was actually up over 100 pips early on Friday. Alas, it just wasn’t meant to be, and the pair is now trading well above the 1.4100 mark.

Overall, I feel that it was a solid setup. All the technical signals were there giving me a clear SELL. Unfortunately, I got blindsided by the drastic drop in oil prices.

Stopped out at 1.4005. -140 pips / -1%

The good news is that I kept my risk under control and only lost 1% on this trade. In the grand scheme of things, I still live to trade another day. For now, I have to take a long hard look at risk sentiment and decide whether the selling will continue, or if commodities can make a comeback.

Trade Update: 2011-08-05 04:20

Good stuff yesterday! The euro rose just enough against the Canadian dollar to trigger my short order at 1.3865 before it came tumbling back down on the ECB’s market-shaking press con.

Even though ECB President Jean Claude Trichet announced that the central bank is “very closely monitoring” inflation, words that would normally spark a euro rally, the euro failed to gain ground yesterday. Apparently, the central bank plans to increase market liquidity and buy more government bonds because of what it believes to be “extreme” market conditions.

The main take away from the press con is that the ECB seems just about as lost in all of this as anyone. Trichet couldn’t reveal how much liquidity it will be providing, and he kept stressing the high level of uncertainty surrounding the economy. This didn’t sit well with traders and naturally and they showed their disappointment by dumping the euro.

But today, it seems as though the markets have chilled out a bit and allowed the euro to recuperate from its losses. EUR/CAD is right below the WATR/61.8% Fib level again! Argh.

In any case, I’m feeling confident enough to hold this trade for a while longer. I may even hold my trade open over the weekend! I’m hoping that the Canadian employment report due later at 11:00 am GMT will give my trade the initial push it needs to gain momentum… and I’m praying the NFP report will seal the deal!

Trade Idea: 2011-08-04 04:29

Now this is a setup that makes sense both fundamentally and technically!

The euro zone is still plagued by debt concerns left and right, which is one reason why it hasn’t made much headway despite all the dollar weakness we saw in past weeks. I don’t expect these worries to fade away overnight, so I believe the euro could be susceptible to some weakness in the coming weeks.

Meanwhile, comdolls have been climbing up the charts, with the Aussie, Kiwi, and Loonie all setting new highs versus the dollar. The Canadian dollar in particular has been flexing its muscle as of late, as there has been speculation that the central bank could raise rates by the end of the year.

Combine potential weakness in the euro and persistent strength in the Canadian dollar and what do you get? A short EUR/CAD bias!

On the technical side of things, after making a steep drop to just above 1.3400 last month, the pair has retraced back and is now just above the 1.3800 handle. Stochastic is also giving us a sell signal, as it’s deep in overbought territory now.

If you ask me, the 1.3850 to 1.3870 area looks like an area where sellers may be looking to establish their short positions. This area happens to lineup with the 61.8% Fibonacci level and with a former support level. Not to mention, the top WATR is also at 1.3866. Talk about a cluster zone!

My plan is to go short at 1.3865, with a wide stop of 140 pips. This is equal to about half the pair’s weekly ATR. I also think that I’ll need a wide stop since we’ve got some top tier data coming out in the form of today’s ECB rate statement, and tomorrow’s Canadian employment and Ivey PMI reports. These reports tends to cause a lot of volatility in the markets, so I think I need to give my trade some slack.

I feel like this is a pretty solid setup, and I hope that I finally get triggered on it. If the 50.0% Fib holds, I may consider just jumping in and risking less units. I don’t wanna miss out for the third week in a row!

Good luck to those of you joining me on this trade! If you guys aren’t fans of EUR/CAD, lemme know on Twitter or on Facebook what other cross setups you’ve got your eyes on! Peace!

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